World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Wednesday, August 18, 2010

Equity futures are roughly flat to slightly higher this morning (but falling into the open) after being down yesterday evening. Bonds are diverging from the up move this morning in stocks with prices that are also higher, the dollar is down, oil is down, and gold is roughly even from yesterday’s close ($1,226).

This morning the near worthless MBA Purchase Applications Index showed a 3.8% decline last week. However, the refinance index supposedly jumped 17.1% in one week, if you can believe that (I don’t). Rates had already hit extreme low levels, that is exactly what Bernanke wants as it does allow people to refinance to lower their monthly payments and thus have more money to spend servicing other debts, LOL. Seriously, this action is like trying to eek out the very last drop of credit into the system possible, a desperate act occurring in the endgame of a Ponzi scheme. Here’s Econoday:

HighlightsLow rates fed a burst of refinancing applications in the August 13 week. The refinancing index jumped 17.1 percent to its highest level since May last year. Rates actually edged higher in the week but remain near record lows with the 30-year at 4.60 percent. Purchase applications fell 3.4 percent to end a welcome run of improvement. The composite index, reflecting the 81 percent share of refinancing applications relative to purchase applications, rose 13.0 percent.

These lower rates are giving the illusion that homes are more affordable than they really are. The low rates keep prices artificially high, and who, exactly, does that help? It helps the banks, that’s why the Fed is willing to use YOUR MONEY to buy down rates like they are doing with the latest version of (visible) quantitative easing.

Just imagine what would happen if rates were to normalize - it would be a disaster in a debt saturated economy, and that's why they can't allow it to happen.

I’ve been keeping a close eye on the real estate market and can tell everyone that prices in this area are still over-inflated, especially in homes above the mean. Comparing potential rents against expenses shows that buying a home to rent is still a losing proposition by quite some margin. This signifies that housing prices still have to fall, even at these historic low interest rates.

Local realtors point to the fact that you can buy a used home now for less money than construction cost… and that is true in some cases, however, it is construction costs that will eventually also be forced lower (some areas are more balanced than others – I am talking about the Puget Sound area of Washington State).

Adding to the constant flow of horrid news surrounding real estate, yesterday it was released that Bankruptcy filings rose 20 percent in the 12-month period ending in June. There were over 1.5 million filings in the year, the highest amount since the central bankers finagled the bankruptcy laws to be even more in their favor in 2005.

From the perspective of someone who recognized the bubble and took action, I want to see lower prices to produce a clean entry point. We are getting closer, and there are occasional distressed sales that come close, but the majority of homes and land that are on the market are listed at far too high of a price to create a market bottom. That’s a conundrum for the economy, it means that housing will continue to be drag – as we already know.

Yesterday’s up action finished what appears to be 3 waves higher from the recent low. Was that it for wave 2? It may have been, as it retraced a perfect 50% and fell back to the 38.2% mark right at the close:

Looking at the daily candles by themselves gives a possibly false bullish indication as this type of daily candle is usually bullish. It's when we look at the wave count and at the fibonacci levels that we can conclude it's possible that the retrace may be over:

The alternative is that wave higher was wave (a), and that the decline into the close was all or part of wave (b), with wave (c) to come. You won’t know until we descend below the prior 1069 low, but if we get beneath about 1084, then the odds are that we are moving down in wave 3 of 3 of 1. That means that the next down stroke should be powerful – there's a train a coming, I sure hope you’re ready…